Retailers showed some bounce Monday despite


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prediction of lackluster sales gains in September, but

Circuit City

(CC) - Get Report

missed the momentum thanks to a downgrade.

The S&P Retail Index added 1.3% after investors shrugged off a preliminary report from Wal-Mart that showed September comps at the low end of estimates. Coming off a crushing hurricane season, with the presidential election less than a month away, investors focused on hopes that a healthy holiday season will materialize once the market's current anxieties are laid to rest.

Big winners included



, adding 2.8%;

J.C. Penney

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, up 3.2%;


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, up 3.1%; and

Federated Department Stores


, up 4%.

Virtually every big-name retail stock followed the broader markets up, except one. Circuit City lost 13 cents, or 0.8%, to $15.52 after Jefferies analyst Donald Trott downgraded the stock to hold from buy, citing concerns about the success of its turnaround efforts going forward.

"We believe

the value of the stock fairly accurately reflects the progress that management has made to date in refining the company's cost structure and in modernizing and/or relocating stores," Trott wrote in a research note. "Hence, we think that a hold rating is more appropriate at this time."

Trott owns the stock. Jefferies has no investment banking relationship with the firm. Circuit City wasn't immediately available to comment.

Circuit City shares have gained 80% since early January when three years of turnaround efforts under the direction of CEO W. Alan McCollough finally started to bear sustenance. Now that the low-hanging fruit of its rebound has been harvested, Trott made a convincing case that the stock, trading at nearly 23 times earnings estimates through February 2006, may have reached the top of its climb.

He points specifically to Circuit's efforts to relocate and refurbish its stores. As the first national chain in consumer electronics, it invested heavily in second- and third-tier locations during the 1980s and early 1990s. Its showroom-style stores used smaller selling spaces. But as competitors like

Best Buy

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came on the scene, with higher-traffic locations and a larger warehouse-style atmosphere that catered to more savvy consumers, Circuit found itself behind the curve.

Since August, Circuit City has relocated 48 stores, producing an average sales lift that is roughly 25 percentage points higher than the remainder of its store base during that time. That figure compares to a 30-percentage-point lift posted by the initial group of relocations, according to Trott's research, suggesting that the more recent relocations are providing a smaller bounce.

Furthermore, Trott said the internal rate of return on the investment involved in relocating stores has declined to an average 15%, down from the previous rate of 20%. He estimates that the most recent relocations are yielding closer to 10%.

Meanwhile, only 25% of the originally designated stores have been moved since the program started in 2002, with another 19 stores having been closed. Trott concludes that "this program has been progressing much slower than anticipated and with decreasingly positive results. It was only a year or two ago that management was hyping the relocation program as a major cornerstone of its efforts to reinvigorate the chain."

Trott's data shows the limits of Circuit's ability to reinvent itself in an increasingly competitive environment. The company posted positive same-store sales for each of the past three quarters, but Best Buy, the dominant player in consumer electronics, shows signs that it is still stealing market share through superior real estate and customer loyalty programs.

Best Buy currently trades at 16 times earnings estimates through February 2006, making Circuit look expensive. Elsewhere, hard-hitting newcomers to the space, like Wal-Mart and


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, continue to gain their own market share in electronics.